Renewable energy has become a potent rallying cry uniting Hollywood and the Beltway. “We can move our economy town by town, state by state to renewable energy and a sustainable future,” Leonardo DiCaprio says in his eight-minute climate movie Carbon, released in August. In his fiscal-showdown speech during his first term, in April 2011, President Obama put Paul Ryan’s proposals for a 70 percent cut in clean energy at the top of his list of reprehensible and unnecessary reductions. “These aren’t the kind of cuts you make when you’re trying to get rid of some waste or find extra savings in the budget,” he said. “These are the kinds of cuts that tell us we can’t afford the America that I believe in and I think you believe in.”
In May of this year, President Obama declared the shift to clean energy a “fight” that was about shaping the sector “that is probably going to have more to do with how well our economy succeeds than just about any other.” At least on that, the president was right. If we get energy wrong, America will throw away the world-leading energy advantages bestowed on it by geology, technology, and capitalism.
Presenting the administration’s Clean Power Plan, EPA administrator Gina McCarthy admitted it was not about pollution control. “It’s about investments in renewables and clean energy,” she told the Senate Committee on Environment and Public Works in July. “This is an investment strategy.” The president’s favorite corporate-tax inverter has a different take on the nature of the investment opportunity. “We get a tax credit if we build a lot of wind farms,” Warren Buffett told Berkshire Hathaway’s investors. “That’s the only reason to build them. They don’t make sense without the tax credit.” While wind investors hoover up the $23 production tax credit per megawatt hour (MWh) of electricity produced, the real costs of intermittent renewables such as wind and solar are many times greater. And they’re not even good at what they’re meant to do – reduce carbon dioxide emissions.
Deriving a large proportion of energy from renewables is proving extremely costly for Germany. Last year, Peter Altmaier, then the energy and environment Minister and now one of Chancellor Angela Merkel’s closest advisers, said that Germany’s effort to decarbonize electricity generation could cost one trillion euros by the end of the 2030s. Not that you would necessarily see that from Germany’s carbon dioxide emissions. Despite lower economic growth in Germany than in the U.S., German emissions have been rising seven times faster – up 9.3 percent between 2009 and 2013 compared with 1.3 percent for the United States.
Indeed, renewable energy provides a textbook case of what the French 19th-century economist Frédéric Bastiat meant when he described the difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. The visible effect of renewables is their use of “free” wind, sun, and running water. All that’s needed to transition from a world of dark, satanic power stations to a clean, low-carbon world are temporary subsidies until renewable power becomes competitive. Hailing the closure of nuclear-power plants in the Midwest due to a glut of wind power, Howard Learner of Chicago’s Environmental Law and Policy Center last year declared: “It’s a matter of economic competitiveness.” This is the story told by Bastiat’s bad economists.
The closure of a nuclear-power station shows that something is amiss. Nuclear-power stations emit no carbon dioxide. Their running costs are low and much of the costs are unavoidable whether the stations are kept open or closed – construction and commissioning at the front-end, de-commissioning at the back. Since 2008, the output of America’s nuclear-power stations has fallen by 0.480 billion MWh, a decline of 6 percent. In a properly functioning market, this shouldn’t be happening.
Advocates of renewables are getting excited about falling costs of solar photovoltaic (PV) panels. According to the Department of Energy (DoE), PV costs have fallen by two thirds since 2010 and the cost of solar-generated electricity has fallen from $21.4 per MWh in 2010 to $11.2 per MWh in 2013, leading the DoE to claim that solar will be “fully cost-competitive” by the end of the decade.” A growing number of Bastiat’s “good” economists have been looking behind the visible costs of renewables. They reveal a very different picture. A 2010 paper by MIT professor Paul Joskow, a leading economist in the field, shows why the DoE’s cost-competitiveness claim is thoroughly misleading. Using levelized costs (life-cycle costs per MWh) to assess the economics of intermittent energy gives the wrong answer because they ignore the changes in the value of electricity throughout the day and the costs of coping with unpredictable renewable energy.
To the life-cycle cost of renewables must be added short-term balancing and longer-term-capacity adequacy to match supply to demand. Because renewables output depends on the weather, an electricity system with a high proportion of renewables needs much more generating capacity. Without renewables, Britain would need 22GW of new capacity to replace aging coal and nuclear-power stations. With renewables, Britain will need 50GW, i.e., 28 GW extra to deal with the intermittency problem. And the more renewables in the system, the worse the problem is. A 2012 analysis by the OECD illustrates the problems caused by the increase in cost due to the increasing scale of wind and solar power. For onshore wind with 10 percent penetration (meaning that wind supplies 10 percent of the energy in that market), the Organisation for Economic Cooperation and Development (OECD) estimates extra balancing and adequacy costs of $7.61 per MWh rising to $11.14 per MWh at 30 percent penetration.
Levelized costs also ignore extra spending on grid infrastructure. Texas is the leading wind state, accounting for nearly 22 percent of the nation’s wind-generated electricity. Transmitting electricity from wind farms in the rural north and west of the state to cities such as Dallas and Houston caused grid congestion. The state decided to have consumers back the inaptly named Competitive Renewable Energy Zones (CREZ) grid program to give wind investors a windfall subsidy in the form of access to nearly 3,600 miles of transmission lines. Subsidies via grid infrastructure spending can be more costly than overt plant-level subsidies. Bill Peacock and Josiah Neeley of the Texas Public Policy Foundation reckon that CREZ costs attributable to wind amount to $6.8 billion. This compares to plant-level subsidies of $4.14 billion in the ten years between 2005 and 2015.
Perhaps the dirtiest secret of renewables is how ineffective they are at displacing carbon dioxide emissions. Brookings senior fellow Charles Frank has calculated that replacing coal with modern combined-cycle gas turbines cuts 2.6 times more emissions than using wind does, and cuts four times as many emissions as solar. If anything, these figures are likely to be too generous to renewables. Frank uses conservative assumptions about the energy consumed for balancing and cycling (starting up or shutting down gas-fired plants). Based on recent research, Edinburgh University’s Professor Gordon Hughes found that balancing costs are nearly ten times higher than Frank’s assumptions and that cycling reduces the amount of CO2 up to 50 percent more than wind turbines do (relative to the classic grid-average method of calculation used by most official bodies such as the International Energy Agency).
The most insidious and destructive effect of renewables, however, is on the wholesale electricity markets. Intermittent renewables, particularly wind, can flood the market at random times of day with zero marginal-cost electricity. The production tax credit means that renewable investors make money from negative prices down to minus $23 per MWh. Episodes of negative prices are evidence of an electricity market that isn’t working. They imply that what is being produced is garbage – someone has to be paid to take the electricity away.
Negative prices crush incentives to invest in the conventional capacity needed to keep the power on when the wind doesn’t blow and the sun doesn’t shine. The OECD report warns that gas, coal, and nuclear-power stations would experience lower electricity prices, reduced load factors, and higher costs because of intermittent renewables. To avoid the risk of “green outs” caused by inadequate investment in conventional and nuclear capacity, governments and regulators have to intervene and construct capacity markets to redress the distortion created by renewables. These don’t come cheap. In the case of Texas, the Brattle Group estimates that a capacity market would cost Texans an extra $3.2 billion a year.
Unseen system costs highlight a critical flaw in the EPA’s Clean Power Plan. With the exception of Texas, electricity systems cross state boundaries. Yet the EPA’s approach, in the words of Gina McCarthy, is to provide states with a flexible path toward compliance. One state’s mandates affect all the other states served by the same system, so the impacts of renewables are on systems, rather than states. Thus the EPA approach risks sparking energy wars between states, illustrating the cluelessness of the EPA and the dangers of allowing an environment agency to craft energy policy. Already North Dakota has refused to co-fund the costs of Minnesota’s renewable energy mandate, which is costing North Dakotans an extra $5.7 million a year. Yet for the EPA to recognize the systems costs of renewables would be to destroy any objective justification for them.
The bad economist, Bastiat wrote, pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. Across the Atlantic, the calamity of renewable energy is becoming more visible each day. It will not be only good economists who see that imitating Europe would be a colossal blunder.